Monday, February 28, 2011

The West is deluding itself over the extent of China's growth

The West is deluding itself over the extent of China's growth By Liam Halligan

The Middle East could be heading for a game-changing implosion. US bond yields are surging and Western central banks, despite growing tension within their ranks, remain in ostrich mode.
When the Panama Canal opening in 1914, it not only lopped 7,000 miles off the New-York-to-San-Francisco shipping route, avoiding Cape Horn, but also brought Europe much closer to Asia.

There seems no end to the steady stream of highly significant economic and political developments these days. We live in incredible times. Yet of all the events I followed last week, of all the data sifted and news wires perused, one story really grabbed me. Although I read it alone, it still elicited an audible "wow!"

China is in "advanced talks" with the Colombian government to build an alternative to the Panama canal. The mooted 220km rail link would run from the Pacific to a new port near Cartagena on Colombia's Atlantic coast. Imported Chinese goods would be assembled for re-export through the Americas and beyond, with Colombia-sourced raw materials filling ships making the return journey to Asia. Beijing is now reaching very high, pushing China onwards to the zenith of its modern-day power.

For centuries, visionaries dreamed of uniting the Atlantic and Pacific oceans by forging a path across Central America's tantalisingly slender isthmus. When that was finally achieved, the Panama Canal opening in 1914, it not only lopped 7,000 miles off the New-York-to-San-Francisco shipping route, avoiding Cape Horn, but also brought Europe much closer to Asia. This single, ultra-strategic waterway, transformed the commercial map of the world.

The canal was, and perhaps remains, the greatest feat of engineering in human history. Under Theodore Roosevelt, America succeeded where the French (and, centuries before them, the Scots) had not. Digging the vast trenches through swamp and forest meant overcoming malaria and coping with frequent flashfloods, while shifting hundreds of millions of tons of rock and soil.

It was a story – told superbly in Hell's Gorge by British historian Matthew Parker – of grit, skullduggery and labour exploitation on a gargantuan scale. Once completed, the canal effectively ended the imperial battle of trade routes and did so in America's favour. Now China has other ideas. The canal carries 300m tonnes of shipping annually – compared to the 80m it was designed to accommodate. Since it was built, world trade has expanded enormously – the UK's combined imports and exports ballooning from 35pc to more than 60pc of GDP in the past 50 years alone.

Large modern cargo ships, including LNG gas vessels, simply cannot fit through – which is why the canal's vast lock gates are currently being widened. But the mooted Sino-Colombian rail-link, involving the expansion of the Pacific port of Buenaventura, the whole thing to be funded by the Chinese Development Bank, would give Beijing its own 50m-tonne-per-year trade conduit, avoiding Panama's US-controlled pinch-point. China could then more easily land goods on America's East coast – provided the US didn't erect more trade barriers. The new Colombian railway might also mean Warren Buffet's vision of revitalising the US freight-rail industry as a land-route for global trade flows across the Americas might not look so smart.

Most of Columbia's coal – it is the world's fifth largest producer – is exported via Atlantic ports to the US and Europe. A new railroad south of the Panama canal could change that too, diverting such resources, via Pacific ports, to China. The Panama canal opened to ocean-going traffic just as the guns began booming in Europe at the start of the First World War. The symbolism was unmistakable. The old world was set on a course of collective self-harm, locked in conflict. The new world, the US, was meanwhile taking control of the high seas. This was truly set to be America's century – and nothing made that clearer than the Panama canal.

Now look where we are, almost 100 years on. America remains the world's largest economy. When it comes to corporate and military power, the US is top dog. There is a clear sense, though, that something has changed.

In an historical blink of an eye, within my adult life-time, America's role on the world stage has been transformed – from unassailable powerbroker, whose authority was rarely questioned, to the status of a fast-fading monarch, notionally still in charge, yet widely seen to be standing in the way of inevitable change. This palpable transformation has coincided with – and been partly caused by – America's shift from being the world's biggest creditor to the world's biggest debtor. The US has been joined in its rapid balance-sheet-reversal by the UK and several other "advanced industrial societies". Weighed down by huge financial liabilities and an expanding rump of unproductive workers, average living standards in America and much of Western Europe are most definitely in relative – if not absolute – decline. The current generation of school leavers in the industrialised world, for the first time in more than 100 years will, on average, be poorer than their parents.

Colombia is Uncle Sam's closest South American ally. But as President Juan Manuel Santos said last week, while cosying up to the Chinese, "Asia is the world economy's new motor". These geo-strategic trends – the rise of the East and the fall of the West – have been apparent for several decades. But they have been accelerated and accentuated by the Western world's "sub-prime crisis". This weekend, the so-called G20 group of nations met in Paris. In just a few short years this expanded group, including the likes of India and South Africa as well as China, has rendered the G7 defunct.

While the West accepts the diplomatic furniture has been re-arranged, we still act as if the world outside has not. "The maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable," Federal Reserve chairman, Ben Bernanke, boomed at the summit. Bernanke was pointing the finger at China – reiterating the Western view that our woes are all due to Beijing's reluctance to let the yuan (which has risen 20pc against the dollar since 2007) appreciate faster still. The response of almost every economist outside the Western world, on reading Bernanke's words, would surely be: "Who are you kidding?"

When it comes to under-valuation, America's "strong dollar" policy of recent years has been a study in how to keep a currency weak. Now the US, and the UK too, have resorted to "quantitative easing", the modern-day equivalent of the beggar-thy-neighbour currency devaluations of the 1930s.

The idea is not only to keep American exports as competitive as possible given relatively high labour costs, but also to impose "soft-default" on US creditors by lowering the real value of American's debts. Bernanke's G20 rhetoric fools no-one. But it does remind the rest of the world of the West's on-going capacity for self-delusion.

China's new "dry canal" between the oceans, its gateway into Latin America, may not happen. Colombia has every incentive to talk it up. Trade between Colombia and China has increased 500-fold since 1980, reaching $5bn (£3.08bn) last year, and Congress has refused to ratify a previously-agreed US-Colombia free-trade agreement for more than four years now. Bogota's patience, understandably, is wearing thin.

China's influence, and its financial muscle, is rising exponentially. Last year, the country loaned more to emerging nations than the World Bank. The fact that Beijing can propose building a new Trans-Continental Railway, in America's backyard, across a land-mass of unmatched strategic importance, and be taken seriously, speaks volumes.

The global power balance is shifting inexorably. The Western world needs to accept that. But as the G20 showed, the policies we propose and the decisions we take, are designed to deny, rather than accommodate, this new reality.

Managing Process centred enterprises

Process Centered Organizations are designed to achieve the highest possible levels of performance from each employee to maximize value, innovation, and growth. Process focus creates a platform for assessing enterprise-wide alignment and identifying opportunities for performance improvement. The 3Cs - the business's customer relations, capabilities, and competencies -constitute the resource platform for the enterprise's future strategies and determine the feasibility of its plans. (Kenneth, 1999) Process Centered Organizations are about groups rather than individuals. This allows them to deal with the issues that occur because the solution has been changed from task to process (McNurlin & Sprague, 2006, p. 570).

When companies stop dividing jobs into tasks as Henry Ford did when he implemented the concept of the assembly line, individuals are no longer just responsible for one small component of the whole. Every person is then responsible for the final result. This can lead to an overwhelming number of diverse tasks which make up the whole. For example, you seldom see anyone getting anyone else to do their typing anymore. Almost anyone in any sort of organization is responsible for doing their own emails, their own mailings etc. No one provided an extra hour to each day to attend to correspondence it was just an expectation. The danger is in burnout and in failures. This can be avoided by ensuring that sufficient employees are assigned to do the amount of work required. It can also require the institution of a more balanced corporate work ethic and work life balance ethos generated by upper management. Performance management must be dealt with differently to encourage a healthy work life balance so that great employees do not become casualties of their own drive or sense of responsibility.

Managing the process-centred enterprise

Hatten, Kenneth J, Rosenthal, Stephen R. Long Range Planning. London: Jun 1999. Vol. 32, Iss. 3; pg. 293, 18 pgs

Saturday, February 26, 2011

Nothing is illegal if.........

Nothing is illegal if one hundred well-placed business men decide to do it.

Andrew Young

Is this still true?

Corporate Deceit

Corporate Deceit

There was so much deceit in the last decade that we may have finally had enough. The Financial markets engaged in an escalating war for your money and they did not show much mercy. Deceit and manipulation became standard operating procedure and it happened on such a grand scale that we did not see the signs.

Communication Equals Deception

We all believe that we can spot a liar but this is simply not true. It is no more true for the cop who is convinced that he can ‘smell’ a lie than it is for you. Most of us are hard wired to live in a society and that means we are hard wired to believe people and to believe in people. Psychological research is very clear that none of us are very good at it. One man who has done exceptional research in the field and who has developed techniques to detect liars is Paul Ekman. His face analysis techniques usually require videotaping and slow motion to really detect it.

As social animals we developed the capacity to interact and work together in order to protect ourselves in a hostile environment. Deception is present even in other primates. It is related to brain size and the complexity of social groups. In most groups the consequence to discovery is exclusion but in small primate networks it might get you killed.

So what’s the problem? Why not lie if it gets you what you want?

Using social exclusion as a form of punishment for deceit would have been a powerful disincentive to freeloading. However, the underlying mechanisms which allow us to successfully and convincingly dissemble didn't go away. We are natural liars and we do it surprisingly often. Try and keep a diary for a single day and record every fib you tell: you'll be startled by the amount of not entirely truthful statements we make. Which brings us to the final nail: we deceive even ourselves about our lying natures.

The Collapse of Trust Mechanisms

In our much more diversely connected modern world it's not hard to see how these basic mechanisms for managing trust can break down. Social networks are so distributed and fragile that our ability to detect fraud and then to figure out how to punish people by exclusion are diminished almost to the point of being completely ineffective. Unless you're a celebrity, of course, and then your transgressions will get splattered all over the media and you'll be rewarded with a whole new stream of sponsorship deals. Strange inverted world we live in.

Given that the traits of casual deception, both of ourselves and others, seems to be built-in to our natures and that the main defence against this is through social networks then it should be obvious that the financial industry will aim to develop close, tight-knit communities with strong links between financial advisors and clients and two-way systems of social feedback - it's not sufficient to merely punish bad customers in the event of deceit, bad advisors need also to suffer the consequences.

When The Moral Compass Goes Missing ...

Of course, this is the exact opposite of what happens in modern business networks. The relentless approach to cost cutting means that the social networks which have traditionally connected customers and advisors have been eliminated and ruthlessly replaced with actuarial models that use historical data to show how much fraud will be committed. These models don't seek to prevent deceit but actually include it, estimating the number of freeloaders who will game the system and developing business models that include these factors.

Unfortunately, as financial institutions have found to their cost, when you take the human being out of its stabilising social network then you remove the guy-ropes that prevent our deceiving brains from coming loose and causing havoc. The surprise is not that more people than expected decided to game the system but that so few did. Actuarial models based on historical data generated in an entirely different context proved to be utterly hopeless at predicting levels of fraud in the new, socially disconnected world.

Liar Loans, Hopeless History

Liar loans are the most public of the problems and financial institutions have rightly been castigated for the lack of due diligence involved in accepting people's word for the fact they had the means to repay them. Many were simply hoping to flip the assets they were buying for a quick profit, although others appear not to have understood the basic principles of taking a loan out. Stuff like needing to pay it back.

The securitisation of these loans - chopping them up into little bits and then repackaging them before on-selling them to other institutions - was the actuarial way of protecting against defaults. In theory, the models told us, the level of default was sufficiently low to justify high credit ratings for these securities. Unfortunately the theory was based on a history generated under different circumstances, where the loan provider and their customer weren't totally divorced and where lying would have consequences for the former, if not the latter. Now, cut loose from the need for honesty, the historical numbers were meaningless.

Trust Psychologists, Not Economists

Of course none of this means that the lying loanees don't bear their share of responsibility but given that trust is determined socially because we're individually prepared to scheme and freeload if left to ourselves then the consequences of such business practices were all too predictable to anyone with even elementary knowledge of human psychology. Unfortunately it seems that the institutions involved never considered that people might behave differently under changed circumstances and left their actuaries alone to prove that historical numbers tell us about the past, not the future. Again.

That we're born liars and our honesty is determined by how likely we are to get away without being caught and punished isn't exactly a morally compelling message. However, being brutally realistic about ourselves is a better basis for making investment decisions than deluding ourselves with a bunch of numbers. Take a human being out of their social network and let them loose without moral constraints and what you have is a recipe for nasty things. But until financial institutions start taking financial lessons in mass deception from psychologists and taking less notice of economists engaged in their own mathematical arms race you'll likely see this happen again and again. And again.

Friday, February 25, 2011

Lessons from an MBA course

I have always felt that individualistic societies have a leaning toward a cult of leadership. I happen to believe that good followers make good leaders and that opinion is born out by many studies. Throughout my study of psychology, it has appeared to me that while leaders can do good, they can also do great evil and so must be somewhat scrutinized and not blindly followed. I believe in the Jeffersonian quote that admonishes us to chain mankind's impulses with the chains of the constitution. Charisma is a very interesting ingredient to the social mix and self promotion and self interest are traps into which leaders can fall hurting many.

What this course has done for me is to balance my perspective. I realize now that psychology often focuses on disfunction rather than the functional. It is a bias that I am pleased to have noted. In this course I admit to being truly surprised by the influence that a leader with the company’s best interests at heart can exert. Men like Kelleher of Southwest, Lafley of Proctor and Gamble, Schultz of Starbucks and Beal of Harley Davidson impressed me. Kelleher and Beal most especially impressed me because they were able to do great business feats without the collateral damage to employees’ lives. They seemed more fully human than many of the others and I would like to have the opportunity to emulate them. All of these people have a keen sense of the business and understand it at a deeper level than some others would. They are visionary and that is exceptional.

There are common threads among the successful leaders and companies.

1. They are able to build a strong corporate culture.

2. They are truth-tellers.

3. They are able to find and cater to under-served markets.

4. They notice what is “invisible" - that is, they spot potential winners or trends before their rivals or customers do.

5. They use price to build competitive advantage.

6. They excel at managing and building their organization's brand (which in some cases may simultaneously be building their own name).

7. They are fast learners.

8. They are skilled at managing risk.

9. They are consummate marketers.

I learned that adversity can be overcome with intelligent business practices, skills with people and with hard work. ‘Never say die’ is not just a slogan but a real business skill that I saw in many business cases. The men who simply gave up like those in leadership at Maytag, Chrysler and others offended me somehow. Did they not really understand the number lives that they were affecting? What happened to the ‘buck stops here’? If they were in for the good times, they should have hung in for the bad. They owed their people that much.

I learned a lot about how companies really gain stable growth. Rapid expansion and acquisitions do not have the same stability as organic growth that comes from focussing on doing what we do well and on innovation. Judicious growth and bricks and mortar acquisition make more sense. People who run businesses as though every cent belonged to a loved one or friend build differently than those who gain large amounts of debt. I think they do it better. I have also learned that acquisitions and mergers are fraught with danger and that any company who plans to undertake one must be very clear as to their reasons and the risks involved. The most important ingredient to be considered is cultural whether international or simply the business culture. The people factors will make or break the manoeuvre so a comprehensive plan must be in place for dealing with the integration of the two work forces.

A few years ago I was deeply impressed by an article in the Harvard Business Review by Michael Porter. He suggested that companies who do what they do best can change the world for the better more successfully than NGOs or governments can. I believe that to be true but it takes a specific kind of company that has a head and a heart. In this course I was introduced to companies that are truly like that. Levi’s is one. It has had its scandals but I see a pattern of behaviour from early days, which continues until today. Social responsibility is not just a catch phrase but a way of doing business. The people of the world have been very lenient with the destructive practices of many companies but their patience has worn thin. When consumers have a choice between two equal offerings they will vote with their dollars for the company which has a better environmental profile. They will know too, because of the internet and social networking will put the information at their finger tips.

I have been surprised to learn how forgiving or forgetful consumers have been. A company can be redeemed by public apology and an expressed intension of reforming. Most people are too busy to hold a grudge and when presented with the company’s offering the next time they will buy your product if they have a good reason. I have been shocked that companies like Pfizer, Merck, Ford, and MetLife moved beyond their shocking behaviours so smoothly. It reminds me again to ‘never, ever say die’.

I also have a deeper respect for the art and business of advertising.

Every cent spent for good advertising is an investment for now and for the future. Differentiating a commodity can create value that people perceive and are willing to pay for. There are so many forms of advertising, so many ways to make an intimate connection with people to help them understand what you offer. The internet is now providing a whole new source and immediacy of contact. I was worried that the kids who grew up under the influence of television would be deeply influenced by it- and they are- but not mindlessly so. This new tech savvy generation is smart and equipped for independent thought. In spite of a declining educational system, they have learned from their environment and are reaching new heights. They will be expecting a lot from the advertisers and companies that have demanded their attention and their resources. Media is powerful but so are they.

Finally, I am more convinced than ever that every company needs to be firing on all cylinders. The Board of Directors must actually direct and be vigilant to oversee what is going on. The leadership must have a vision and must be able to communicate it. The entire focus must be customer centric but the best companies really do value their employees. There must be ethical oversight by a distinct body within the corporation. Globalization is only acceptable if it means operating on a Global scale for the good of all stakeholders no matter how poor or marginalized. Marketing must be top notch and creative. Throwing dollars at problems does not work. I did not know that logistics was part of marketing but it makes sense and I now see just how very vital it is to the company, to the distribution system and to the customer. It is far more complicated and requires far more organization than I ever considered. Employees must feel hope, empowerment and commitment to the company and from the company. Businesses are, after all, human social organizations created to fulfill a need.

Mistakes will happen. They are part of being human with our distractibility, frailties, our misconceptions and our growth processes. Many mistakes in business can be eliminated with good processes and systems. Good companies need to understand where people make errors and design the work and the products around human abilities and tendencies. This will be done as good design is being incorporated in business at every level.

Success can be enduring. I have often chaffed at the idea of product life cycles when businesses have not done all that they could to ensure that a product lives on. Look at Levi’s for an example. Work pants! What was its original market and potential market? Savvy people saw them as more than just a commodity and they have lasted for over a hundred years as a FASHION statement. On paper that should be next to impossible but MARKETING made the difference. I did say that it could be enduring but it probably won’t be a straight line and it won’t be easy. It will take good business practices!

Thursday, February 24, 2011

My wish for the Arab People et al of the Middle East

My Wish for the Arab nations of the Middle East in Today's climate

The governments of the middle east proclaimed that Wikileaks was an American plot. While I think that is unlikely, it appears that a convergence of factors which might have included the revelations that came from Cablegate but certainly included the connection technology of the internet on one hand, and abuses by their own people in power on the other, has led inexorably to the unrest and change in the Arab nations of the middle east.

We all, east and west, will pay a price for the change that is fomenting and bubbling over. In the west, it will primarily be in increased dollars for the fluid oil but in the East it will be paid for in precisious and sacred fluid blood. I grieve for the price those people of good will will pay.

I hope that the people of these countries who have been oppressed and denegrated will be rewarded by the sort of government that every mother, parent, citizen wishes to have in every country: that is a government that does not see its people as simply a resource to be used and abused but as the very definition of what a country is. Countries are people not just land. Countries are people not just resources. Countries are a collection of people's dreams for a future that is healthy, adeqately fed, with enough water to drink, others to love in safety and the prosperity that comes of dedicated work. All of our governments have much to learn.

To you I repost this video from Youtube of Yousef (formerly Cat Stevens) in the hope that your struggles lead to the peace train.

Big Emerging Markets and Opportunities

Big emerging markets are normally considered to be the BRIC nations and sometimes BRICK standing for Brazil, Russia, India, China and South Korea. They represent the nations of the world with large populations, some of which are transitioning from closed economies to open market economies. As they emerge it is hoped that they will embrace economic reforms, transparency and efficiency in their capital markets. This draws foreign investment and that increases the speed of advancement which hopefully leads to significant growth in GDP and more major economic reforms. According to the United States department of Commerce website: ( Exhibit 6 Exports, Imports and Trade Balance by country and area, Not Seasonally adjusted 2009- this is the rank order of the United State’s first 17 trading partners:

1. China

2. Canada

3. Mexico

4. Japan

5. Germany

6. United Kingdom

7. South Korea

8. France

9. Taiwan

10. Ireland

11. Venezuella

12. Italy

13. Malaysia

14. Saudi Arabia

15. India

16. Brazil

17. Thailand

Of these nations some adjustments are necessary to determine the 3 biggest emerging nations. China is an obvious choice with the world’s largest population. It recently replaced Canada as the number one trading partner of the USA. Its GDP is $7.926 trillion, the world second largest but it rates 100th in per capita GDP at $5,970 which when normalized is $3,259. In addition there are still major problems in doing business with China. Its form of government and its monetary strategy are two examples. According to the World Bank however, China’s reforms and growth have lifted “several hundred million” people from absolute poverty since the late 1970s. This accounts for 70% of the world wide poverty reduction in the last 20 years- quite an accomplishment. Another promising statistic is that women and girls are 99% literate. This is a statistic that is unique among developing nations.

South Korea would be the second choice according to this list with a population of 50,062,000 (24th in the world) and a GDP of $1,344 Trillion (13th). The per capital income is $27,692 nominally adjusted to $19,136. This country is the 13th largest exporter in the world and is the third largest exporter to China and Japan. Although it has a smaller population base, I have chosen South Korea because of its location and trading relationship with China which gives it a marked advantage for the future in export income.

The final choice is among Venezuela, India and Brazil. All three countries are republics. India represents the world’s second largest population at 1,176,411,00 with a GDP of 3.298 trillion (4th largest in the world). Per capita that comes to $2,930 (130th) but normalized it is $1,017. Venezuela represents the world’s 40th largest population with an estimated 26,814,843 people. The GDP is 359.210 billion (31st) and per capita $12,806 normalized to $11,388 in PPP. Finally, Brazil is the world’s fifth largest population with an estimated 192,272,890 people. Their GDP is $1,612,539 Trillion (9th) with a per capital income of $10,455 adjusted to $7,737.

Although Brazil currently represents a far greater per capita buying power, I will choose India as my third major emerging market because of its huge internal potential market and the strong annual growth of GDP.

With its huge population and need to feed its population India needs potash as a form of fertilizer for its fields and crops. Unlike many of the emerging nations, India has no natural reserves of potash and has significant problems with producing sufficient food to feed its population. Potash does not represent any sort of cultural taboo as it is not animal based and enhances life. As a commodity item, it is not the most amenable to branding but excellent results in marketing with an educational component to standardize farming practices could make a big difference while making a sound profit. Hershey, the chocolate company has made great strides in Vietnam by introducing chocolate as a cash crop and educating the farmers in best practices. A similar model, at an earlier stage of development would work well for potash sales in India. According to the World Bank statistics, starting a business can be accomplished in 30 days. The issue of infrastructure must be considered a problem in the delivery of potash to rural locations but it can be delivered by the ubiquitous ox cart and the price of potash would make it available to the farmers that own them.

The South Koreans are high of the collective and social connection aspect described by Hofstede’s cultural dimensions (Catorea, p106). They are also more advanced in the use of social networking than many North Americans are. There is a real need to adapt to their improved marketing methods and models of doing business so that Facebook can make the leap from the number 4 provider. I learned a lot from the following PowerPoint presentation: Korea has a huge youth population that has embraced the social networking idea.
For China I have chosen to market a waterless compostable toilet. The state of infrastructure in China leads me to believe that this is a great idea. In North America we are faced with replacing outdated sewage systems which contribute to pollution of our land and waterways. Neither the North American model nor the current Chinese model for handling human sewage is sustainable. China has few roads, let alone sewage systems and electrical power is not always available in rural areas either. China is embarking on collective transportation such as bullet trains rather than facilitating the individualistic modes of transportation. The toilets are manufactured by Envirolet and were recognized as one of the products that just might save the world by Business Week magazine. “….statistics of sanitation. Some 2.6 billion people do not have sanitation, which is just stunning, and gets no political attention … Four in ten people are without proper sanitation. I couldn't believe people have absolutely no sanitation. For them, sanitation is the nearest bush or roadside” (George, 2009). This state of affairs leads to the death of millions of children and the transmission of disease that has huge societal costs.

In Chinese society human feces are often used as fertilizer and there are many health risks associated with this practice. These units provide a healthier way to first world sanitization with the added bonus of useable healthier composted fertilizer. “The readers of the “British Medical Journal,” who are qualified medical professionals, voted the toilet as the biggest medical advance of the last 200 years, over penicillin and the Pill”. With no electrical or water hook up required this can bring a higher standard of health and living to rural populations. If entire cities could be built in rural areas without the need for sewers, a huge burden would be lifted from government resources. The toilets weigh approximately 105 lbs and they come in a single box. According to the World Bank chart included in Appendix one only 69% of urban dwellers have improved sanitation facilities. This leaves a huge market throughout China.


There are huge opportunities in the Big Emerging Markets for those who are willing to understand the cultures, the statistics and the business models that are adaptable to those societies. It would be important for anyone seeking to do business in one of these nations to form partnerships with trustworthy nationals to facilitate acceptance and proper marketing techniques. The recommendations in this paper are based on the level of development of each society, the perceived needs and an understanding of the Department of Commerce and World Bank statistics.

China to account for 8-9% of global M&A deals: JPMorgan

By Terril Yue Jones (China Daily)

Updated: 2011-02-24 10:08

BEIJING - China should account for 8 to 9 percent of global mergers and acquisition (M&A)activity this year, continuing close to its strong levels in 2009 and 2010, according to the head of JPMorgan's China M&A unit, Brian Gu on Tuesday.

Consolidation in the consumer retail, real estate, healthcare, and chemical and industrial sectors is likely to power China's domestic M&A this year, he said.

China's inbound and outbound M&A deals in 2010 amounted to $236 billion out of a global total of $2.8 trillion, or a little more than 8 percent, Gu said.

"Amid an overall recovery in M&A activity globally, China has seen a sharp rise, taking advantage of the financial crisis and maintained a pretty large share in this rebounding market last year," said Gu.

"Overall China, as a large component of global M&A activity, is here to stay," Gu said.

The country accounted for 2 to 4 percent of worldwide M&A activity from 2003 to 2007, according to the data analysis and consulting firm Dealogic. In 2009, China's share rose to its peak of 9 percent as the global financial crisis held back M&A activity abroad.

China will probably continue its performance in outbound M&A after chalking up a record $54 billion in 2010, Gu said.

Recent stumbles by Chinese firms seeking to acquire all or part of foreign companies, such as Huawei's attempt to acquire server technology firm 3Leaf and Xinmao Group's play for the Dutch cable maker Draka shouldn't cast a shadow on future outbound Chinese deals, Gu said.

Those deals had aspects unique to them that shouldn't bode ill for Chinese acquisitions in general.

Inbound deals are also unlikely to be much affected by China's recent announcement that it will set up a commission to review foreign investment projects in the country for national security implications.

"China has always regulated inbound M&A from a security perspective," Gu said.

"I don't think this changes the regulatory environment; it doesn't mean it's more stringent or more loose," Gu said. "I think it does lay out a protocol that parties can actually point to as to the process by which they'll be evaluated."

JPMorgan handled the largest volume of cross-border Chinese M&A last year, with a transaction volume of $11.1 billion, or 10.6 percent of the market, according to Dealogic. Credit Suisse was a close second with $10.7 billion, or 10.2 percent

Managerial Ethics

Ethics can be defined as a set of inner-guiding principles, values, and beliefs that people use to analyze or interpret situations and then to decide the appropriate way to behave. I contend that companies should not leave these sorts of decisions up to individual interpretation but should attempt to set a moral ethos for the company in anticipation of any such dilemmas. These should include ways to behave to avoid harming others, including customers and coworkers, the company itself and the world at large. While not every situation can be anticipated, a set of basic principles which are endorsed by the company should be able to communicate what the company expects.
For example, a manager might believe in “doing unto others what she would have them do unto her”. Letting someone know that lay offs are imminent would offer an employee some time to prepare for a life changing event. This appears to conform to that idea of ‘doing unto others’ because anyone would really want to have forewarning of such an event. However, when we consider the manager’s obligation to the firm, we realize that early warning to even one person might not be contained and could have consequences for the stock price, credit ratings and a whole host of other unanticipated outcomes that might affect even more lives. A decision like this cannot be left up to an individual’s conscience because they might not have all of the information, may not have considered the ramifications and it is too great a stress for one person to have to bear. When the company clearly states its position, the individual has guidelines and expectations within which to operate. After all there will be other, more subtle ethical problems for managers to bear.

Managers find themselves in ethical dilemmas when they are faced with temptations for enhancing their own self interest, when they are responsible for actions of others, when they are pressured by expectations or when they are pressured by people in positions that are above them. Some will adhere to the letter of the law. Some will go with their own interpretation of ethics. Everyone should, however, take a few breaths and think things through. First, they should get the facts- to whatever extent is possible. Many times ethical decisions must be made with very little information and on tight time schedules. Slow things down as much as possible and get as much light on the situation as possible. Find out if there are different agendas at play. Find out if it is an ethical issue at all. Find out if it is an ethical situation that is yours to solve. Then, if it is yours, try to find someone to consult with. It should be someone outside of the problem, someone who might have a neutrality and perspective. Perhaps that person would be an old professor, a former boss in another firm, or even a lawyer. Once you have discussed it and it appears that it is a true ethical dilemma, one must then decide what course of action to take. Some things are easier to decide about than others. If something is clearly illegal and unethical the decision should be morally easy even if the process and the outcomes might be very painful. The right course of action is to report the problem to the authorities and the reality is that the consequences for not doing so might be very harsh indeed. This includes situations in which company employees enrich themselves at the expense of stockholders such as Enron, WorldCom, Tyco and Arthur Anderson.

Stakeholders can also be affected by unethical actions. Actions that hurt the company’s reputation hurt the stock holders. This too is an ethical dilemma because exposing wrong doing can result in a media scandal that hurts the reputation of the company but that is short term thinking. Managers are often in the position of having to juggle the interests of various stakeholders and the decisions can be stressful. For example, withholding a raise for a deserving employee leaves a bit more money for your own raise or for the conference you wish to attend. Suppliers and distributors can be a source of ethical dilemmas. They may be more favourably disposed toward your company after that weekend in the Jamaica but is that ‘buying’ their business? Conversely, you might be able to improve your bottom line by delaying paying them. My overall point in this section is that many of these problems could disappear if the company had solid policies on how the company handles such questions.

Organizational culture should include a mandate from the very top of the organization and a reinforced set of communications that let everyone know what is expected. Social responsibility should be expressed as the norm. Everyone should have easy access to the written code of conduct. Managers should be role models in this process. There should be an ‘ethics’ officer or an ombudsman who is a safe placed to report problems or to get advice. This person must not be a token but be empowered to act and to protect those who come forward. This ombudsman should have organization wide authority. People who risk coming forward should be considered a great asset to the company and protected from
repercussions which might result from the report.

Managers faced with moral dilemmas should analyze the issues according to four ethical guidelines. Consider first the utilitarian rule and ask what will produce the greatest good for the greatest number of people? Then ask ‘What course of action protects the fundamental rights and privileges of the people involved’. Then compare and contrast the possible outcomes for an alternative which promotes the fairest outcome for all. Finally, ask yourself ‘Would an impartial observer find this outcome acceptable?’

There are times when the ethical problem is a really big one. The problem remains that there are times when doing the right thing has personal consequences. Few companies have ethical ombudsmen who have the power to protect those who are brave enough to come forward. Reporting your boss, reporting systemic wrong doing within a company, or reporting illegal activities puts a target on your back. At times like that, I remind myself that I help to create the world in which my kids and everyone else’s children must live. I remind myself that I am small but that my actions can be like a rudder that steers the world to better place or at least I am responsible to try. Then I do the right thing and hope for the best.

Tuesday, February 22, 2011

Porter’s Five Factor Model and the Hotel Industry:

Review and Recommendations
Management Information Systems


The combined forces of an economic recession and H1N1 epidemic are causing the hotel industry to suffer in a time of great challenge. Business travel is down because of the recession and the pandemic has significantly reduced tourism. This paper considers three types of hoteliers in current market conditions in light of Porter’s theories. Now, more than ever, Porter’s well regarded thoughts on business strategy and the Internet, first published in 2001, are crucial to consider and they contribute to an analysis and critique of the hotel industry’s internet strategy. In his Harvard Business Review article of 2001 Porter said “To find the answer we need to look beyond the immediate market signals to the two fundamental factors that determine profitability: Industry structure, which determines the profitability of the average competitor and sustainable competitive advantage which allows a company to outperform the average competitor” (Porter, 2001). This paper examines the five forces which impact competitiveness within and thus the profitability of a competitor in the hotel industry. From the guidance provided in the Five Factor Model recommendations are made to enhance and refine internet strategy for the considered hotel chains.


The hotels chosen for this paper are: Vintage Inns primarily located in Niagara-on-the-Lake, Canada, Sheraton Hotel chain and Best Western Hotel Chain. “Every business must design a strategy for achieving its goals, consisting of marketing strategy and compatible technological strategy and sourcing strategy”. (Kotler & Keller,2006) “To identify rivals in the international hotel industry, current practice is to use price, segment and proximity” (Matthew, 2000). In previous work, Michael Porter outlined three additional generic strategies that could be used. These are: overall cost leadership, differentiation, and focus.

“The point to be understood here is that any company can have a core competence, but it is competitive competence which gives them a chance to win. For example, Ritz-Carlton, Fairmont, Loews, Four Seasons, Intern-Continental, W Hotel, Hotel Sofitel, Le Meridien are ruling the hospitality industry. This is because of there ability to set up state of the art hotels and their ability to provide exceptional customer service with focus on customer relationship management. The customer relationship is a unique selling point (USP). The “Service” is both their core competitiveness and also their competitive competence” (Trehan, 2005)

Porter’s Five Factor Model

According to Porter (2001) the internet is an enabling technology that can be used within the context of a good business strategy in any industry. Although the Internet alters industry structures and levels the competitive ground often dampening profitability in the industry, it can be used to encourage and promote greater profitability if properly implemented. The five forces that impact competitiveness which are outlined in Porter’s 1980 work are: barriers to entry, threat of substitutes, bargaining power of buyers and sellers, and the rivalry among existing competitors. In 2001 Porter considered these factors in light of the internet technologies. The influence of the internet has been profound especially in the hotel industry. According to Porter each factor has a different relevance or impact on different businesses so they are presented below in order of impact for hotels. Porter indicates that the great paradox of the internet is that the benefits it creates such as making information easily available, reducing purchasing hassles, and marketing which allow customers to find what is of interest are the very things that make it more difficult for companies to “capture those benefits as profits.” (2001). The most important determinant of a marketplace’s profit potential is the intrinsic power of buyers and sellers.

Threat of Substitute Goods

In the hotel industry there is usually another hotel just around the corner. They appear in all price ranges, with varying levels of service and amenities. The constant challenge will always be to get the guest to choose your hotel over the competitor. The internet makes the overall market more efficient while expanding the size of the potential market and creating new substitution threats. Given the potency of this threat a superb internet presence is vital.

Another ongoing threat is that another hotel chain may erode your customer base with a newly formulated internet approach or marketing campaign. This is supported by the following quote from Luck and Lancaster (2003):

“The development of value chain process analysis, supported by collaborative event management over the Internet, the structuring and the sharing of customer focused value chain data, powerfully enhance the performance of value chains and of electronic commerce.”

Bargaining Power of Buyers

Business persons choosing a hotel for business travel are savvy consumers and they are comfortable with computer technology. It has become very simple for them to go online and book a hotel. They no longer need travel agents, corporate travel consultants or middle men of any kind to determine where they will stay. Porter’s model predicts this elimination of intermediaries.

Tourists are more and more capable of using the internet in the same way but in another fulfillment of Porter’s model, they are more often bonding together in a novel way. They are finding internet businesses like which will negotiate or discover bargains for them. Both of these processes shift the bargaining power to the end user as the Porter model predicts and these same freedoms reduce the cost of switching so that loyalty is a thing of the past unless a particular hotel uses its one time opportunity when a customer stays at the hotel to deeply impress the customer with a unique and valuable differentiator.

Rivalry among existing competitors

The rivalry among competitors in the hotel industry is fierce. When potential customers can learn about a hotel on line, the internet reduces the differences among competitors. People tend to seek the best price for the best experience and the tendency is to reduce price to be competitive. The internet covers wide geographical areas so the market is widened increasing the number of competitors. For example, someone who wants to spend the day in the historic town of Niagara-on-the-:Lake can easily choose a hotel in a near by town if the amenities or the price are better. Variable and fixed costs can be different in areas that are more expensive to live and work making it more difficult for a hotel in Niagara on the Lake to reduce their prices to the level of one in nearby St. Catharines.

Barriers to Entry

The initial investment in the hotel industry creates quite a barrier to entry but certain barriers to entering the hotel market are reduced by the internet. A presence on the internet reduces upstart marketing costs somewhat, and gives the new competitor access to potential suppliers and resources. Even a bed and breakfast can use the websites of large chains to understand the key marketing concepts and the lures for customers. Switching costs are usually nil for a consumer. (McNurlin, 2006)

A vital barrier would be differentiation. A hotel that can differential itself by location, by service, amenities or some other quality has the potential to attract and keep its clients. Another barrier to entry would be expertise. Unfortunately, in a mobile society employees frequently leave one hotel chain to work in another and they take that expertise in terms of training or of experience with them. It is in the areas of expertise and of differentiation that a hotel can make the greatest impact on its client and thereby on its bottom line. In fact many established companies have synergies between their established business and online technology.

Bargaining power of suppliers

While this is not a substantial threat in the hotel industry it can have impact especially in the area of labor. With an aging population, there are fewer people to fill service industry jobs and hotels which can attract excellent staff have a greater chance of providing excellent and exceptional experiences to their clientele. As part of their internet strategy all hotel chains should have a section on recruitment for employment.

The other supplies that are needed by hotels are also easier to attain through internet channels whether originated by the supplier or by the hotel chain. With their products in greater demand by greater numbers of hoteliers suppliers gain some measure of power by competition for their offerings.

All of the hotels listed above can benefit from internet applications that produce greater value in the value chain. The firm’s infastructure can benefit from financial and ERP systems. Communicating with investors can also be done by internet. Human resources can be managed by the internet as part of the overall strategy as well providing internet based self service personnel and benefits, web based training, internet based sharing of information and knowledge and electronic time and expense reporting. Value can be increased by standardizing technology across multiple locations, forming knowledge directories, and allowing real time access to online booking information. Finally, every hotel could benefit by online inventory control and forecasting systems with suppliers. These improvements can all lead to greater profitability (Porter, 2001)

Each type of hotel needs to identify its unique strengths and target market and align its internet strategy to support that identity Will the chain choose to be low cost, or to command a premium price? Distinguishing oneself from the competition becomes vital. This can be enhanced by superior technology, through superior inputs, through better training of staff or through better management. Differentiation adds value but the internet makes it hard to maintain those distinctive strategic positions because it eases change to best practices and it improves operational effectiveness. Never the less such distinctions make the business more profitable.

By its basic nature the hotel industry is fragmented. The internet makes it easier for travelers from far and wide to learn about the hotel or to order a room but the customer must still come to the hotel for the service. This makes it more likely that the profitability will be there for when sale is easy to transact and complete the profit margin usually decreases. Porter points out similar examples with Real Estate and with furniture sales.

Dealing directly is great for hotels. Other than travel agencies who arranged hotel stays the hotel business has always been a face to face business and this normally sustains the economic value of the transaction. For all of these chains the internet complements rather than cannibalizes established ways of doing business. It becomes one more link in the value chain.

Every chain listed below should use its website to attract employees and to communicate a philosophy of management. In the employment section the designers must remember that they are communicating not only to potential employees but also communicating the service standards that the guests can expect.

Vintage Inns

Vintage Inns started in Niagara-on-the-Lake approximately 25 years ago when a recent immigrant bought many of the established old hotels in town. Since that time a focused business strategy has born fruit. It has established itself as a premium priced set of four diamond and five star hotels in an historical town offering a unique and pampered experience to customers who wish to enjoy the old town atmosphere. Its vision is supported by its internet presence. The site is simple but elegant. It is unaffiliated with rewards programs or with alliance programs and it partners with only two other historical inns in Ontario. It caters to those who have the resources and the wish to experience luxurious accommodations, fine dining, spas and the Shaw Festival theatre and the town’s shopping district in the wine country of Niagara. They cater to tourists, business, and weddings. The Vintage Inn website has a high quality video presentation that attempts to give the viewer a sense of the luxury, indulgence and pleasures available while staying at Vintage Inns. It communicates that the experiences of the town and its resources and history are highly integrated with the luxury experience of the hotels. Internet brands are difficult to build because the tangible experience of physical presence and of human contact are missing but the Vintage Inns video on its website goes a long way toward addressing this branding need.

From Porter’s research a hotel chain such as this must differentiate itself to compete. It has chosen first class luxury and setting as differentials. The internet strategy must support those strategies emphasizing an all encompassing luxury in a setting that provides an arts, cultural and historical experience in every aspect. It needs a website to communicate luxury, unique and pampering experience, to take bookings and demonstrate potential products and services. Like many luxury items, marketing by referral and exclusivity has its appeal so it should not ally with other hotels for internet marketing. They must not join any sell-off sites or organizations to offer rooms at discount prices for that would undermine their luxury status. Similarly joining “reward programs” would reduce their sense of upper class exclusivity. Alliances on the website must be limited to other luxury experiences such as helicopter rides, exclusive golf clubs and Shaw festival theatre packages, horse and buggy rides to historical sites and specialized wine tour experiences. These act as ‘complements’ in Porter’s view and raise profitability by being uniquely paired with the service provided in a manner that is not available anywhere else. The website must also indicate the hotel’s expertise in providing uncomplicated luxury experience. It should also steer away from any vestige of “sale prices”. It must erect an internet barrier that says that there is no substitute for luxury and no replacement for a true historical experience.

Sheraton Hotels

Sheraton Hotels Chain is a world wide concern. They provide luxury and upscale full-service hotels, resorts and residence and is the largest brand serving in the Starwood alliance. The needs of luxury and upscale business and leisure travelers worldwide are their focus. “ From full-service hotels in major cities to luxurious resorts by the water, Sheraton can be found in the most sought-after cities and resort destinations around the world. Every guest at Sheraton hotels and resorts feels a warm and welcoming connection, the feeling you have when you walk into a place and your favorite song is playing - a sense of comfort and belonging. Our most recent innovation, the Link@Sheraton(SM) with Microsoft, encourages hotel guests to come out of their rooms to enjoy the energy and social opportunities of traveling. At Sheraton, we help our guests connect to what matters most to them, the office, home and the best spots in town.”

The luxury experience is limited and focused on the bed, bedding, modern room décor and complementary spa products in the room. It is augmented by staff training and room service.As Porter pointed out in his 2001 article, some things must be excluded to focus on what the company does best. The website must be easy to use, communicate a comfortable level of luxury for primarily modern business travelers to world wide destinations, and encourage booking. It also must indicate that the welcome feeling is part of what the staff is trained to provide as an expertise. IT also communicates the standardization of expectation world wide and the meeting of the human need for connection as a differential. Alliances and reward programs make the cost of switching higher. Especially for the business traveler, for whom rewards are personally redeemable, staying with the chain provides rewards that the individual can enjoy only if they return whether on more business that costs him personally nothing or for a discounted or free personal stay. This is a clever way to increase the cost of switching.

Best Western

The final hotel in this comparison is Best Western the world’s largest hotel chain.

Best Western International is THE WORLD'S LARGEST HOTEL CHAIN®, providing marketing, reservations and operational support to over 4,000* independently owned and operated member hotels in 801 countries and territories worldwide. An industry pioneer since 1946, Best Western has grown into an iconic brand that hosts 400,000* worldwide guests each night. Best Western's diverse property portfolio, its greatest strength, stems from a business model designed to give owners maximum flexibility to address market-specific needs. Equally committed to the business and leisure traveler, Best Western recently embarked on a five-year mission to lead the hotel industry in customer care. Since 2004, Best Western has served as the Official Hotel of NASCAR®. For more information or to make a reservation, please visit


It is clear that the company realized the importance of the website for a world wide company, of independently owned hotels because the website was awarded top honors for ease of use, design, innovation, content, technology, interactivity and copywriting achieving 67 of a possible 70 points to win the outstanding web site award in Hotel and Lodging category in Web Marketing Association’s 12th annual Webaward competition in 2008. This chain differentiates itself a bit like MacDonald’s does by offering a standardized experience world-wide so that there are no huge surprises and instant recognition. Décor may be different but the experience is on par no matter where the traveler lands. The internet must communicate a high quality experience at a reasonable price. It must communicate standardization of room quality, cleanliness, and high standard of service with a variety of amenities. Alliances and reward programs are vital for this chain too. They increase the cost of switching from Porter’s predictions to a different consumer in a different price grouping. Porter calls this effect such as reward programs create “stickiness” of a website. (Porter 2001)


Whether a hotel or hotel chain is well established or brand new, the five underlying forces of competition which include: the threat of substitution, the bargaining power of buyers, the intensity of rivalry among competitors, the barriers to entry for new competitors, and the bargaining power of suppliers helps determine its profitability and should it should shape its internet presence. Combined, these factors can determine economic value and even survival. Internet technology can provide opportunities for companies to communicate and establish unique or distinctive positions for their businesses. In the case of hoteliers this is crucial. Porter’s five factor model helps us understand the rise of new ideas and internet businesses like in the context of the “Bargaining power of Buyers”. It helps us understand what drives businesses to differentiate themselves and their internet approach. It also explains why labor may have greater bargaining power in hotels who all need skilled workers as the population ages as it is predicted by Porter’s concept of the “Bargaining power of Suppliers”. In reviewing the internet strategies of three hotel chains, differentiation is clearly the key component. Some have chosen to differentiate by location and by luxurious experience. Others, like Best Western have differentiated themselves by standardization and by price. Their internet strategies must align with their business strategy to produce the desired profitability and Porter’s model leads the way by outlining the issues and the dangers inherent in each force. In this paper, recommendations for internet success were made based on Porter’s model and implementation of these suggestions could ensure greater or continued profitability in a time of great stress from both recession and the ongoing pandemic. They include not only customer interaction on the internet but also internet applications in a variety of areas such as supply chain, financial and Human Resources to increase the value chain. In the final analysis, however, Porter makes it clear that the internet can and will add value when it is used in conjunction with good business strategy,

Fairtheworld; Fairtheworld Launches a Full Cooperative Plan with Global Four and Five Star Hotels, Healthcare Mergers, Acquisition & Ventures Week. Atlanta: Jul 11, 2009. pg. 560

Kotler, P, Keller, K.L, (2006)Marketing Management, 12th edition, Upper Saddle River, New Jersey
Luck, D, Lancaster, M, (2003) Managerial Auditing Journal. Bradford: 18-3, p213
Matthews, V. E. (2000) International Journal of Contemporary Hospitality Management. 12-2, 114-118
McNurlin, B. C., & Sprague, R. H., Jr. (2006). Information systems management in practice (7th ed.). Upper Saddle River, NJ: Prentice Hall.
Porter, M. (2001). Strategy and the Internet. Harvard Business Review 79(3). 62-78> Fairtheworld

Trehan, R.(2005) 8EDD-99EC4B216C9C_HOT200810K.pdf

http://www /newsroom/pressreleases_detail.asp?NewsID=620

Follow up to Best Buy Post

Best Buy to close Chinese stores

Best Buy, America's largest consumer electronics retailer, plans to close its branded stores in China as it tries to develop a more successful way of finding customers in the world's fastest-growing major economy. Best Buy has sought to benefit from the wave of rising disposable incomes in what were once considered developing economies Photo: Reuters By Richard Blackden 5:32PM GMT 22 Feb 2011


Nine Best Buy branded stores will close as the retailer devotes its expansion efforts in the country to Five Star, a domestic retail chain that it acquired for $180m (£112m) 2006. Best Buy also told investors, who have seen the shares slide almost 10pc in the past 12 months amid a broader rise in the stock market, that it will exit the Turkish market.

Like other US retailers, Best Buy has sought to benefit from the wave of rising disposable incomes in what were once considered developing economies. Brian Dunn, chief executive, said that the moves are "consistent with our strategy of driving businesses that have earned the right to additional capital while curtailing activities that we believe will not meet our return on investment thresholds".

Best Buy has been under increased pressure after its US sales during the critical holiday period between Thanksgiving and Christmas failed to match Wall Street's expectations. Mr Dunn said that rejigging its strategy will save it up to $70m a year. In the US, by far the largest market for the chain, Best Buy plans to open 150 smaller stores this year.

List of Recent Market Mergers

The proposed merger of the TMX Group and the London Stock Exchange Group is the latest in a long line of stock market consolidations. It may be a case of bigger is better when it comes to competing on the global trading stage.

Here's a list of some recent market mergers:

Feb. 9, 2011: NYSE Euronext, which operates the New York Stock Exchange, announces it is in advanced merger talks with Frankfurt-based Deutsche Borse, which runs Germany's largest exchange. If the deal goes through, Deutsche Borse will hold 60 per cent of the combined company, making it the world's largest exchange operator by revenue and profit.

Feb. 8, 2011: The TMX Group, operator of the Toronto Stock Exchange and the Toronto Venture Exchange, announces it has agreed to merge with the London Stock Exchange Group. If approved, the merger will create the world's biggest stock exchange, with more than 6,000 companies traded, including the vast majority of the world's publicly traded energy and resource companies. The deal requires regulatory approval from the Canadian government.

Oct. 25, 2010: The Singapore Exchange and the ASX, Australia's main stock exchange operator, agree to an $8.3-billion US merger, creating Asia's fourth-largest stock exchange. It is the first major consolidation of Asia-Pacific exchanges. The deal is awaiting approval from Australia's Foreign Investment Review Board.

March 17, 2008: CME Group — the world's largest futures market — buys Nymex Holdings Inc., parent company of the New York Mercantile Exchange and the world's largest energy market, in a deal valued at $8.9 billion US.

Dec. 10, 2007: The TSX Group announces a deal to acquire the Montreal Stock Exchange in a $1.3-billion merger. The new company would be known as the TMX Group, with the Montreal branch focusing solely on trading in derivatives. The Montreal exchange has limited itself to derivatives since 1999. The Caisse de dépôt et placement du Québec pension fund — which has an eight-per-cent stake in the Montreal exchange — called for a public inquiry into the merger amid concerns that the larger entity could eventually fall into foreign hands. At the time, Nymex Holdings had a 10-per-cent ownership stake in the Montreal exchange.

Nasdaq's bid to gain control of the London Stock Exchange failed on Feb. 10, 2007. It has since acquired several other smaller exchanges. (Kathy Willens/Associated Press)Nov. 7, 2007: Nasdaq buys the Philadelphia Stock Exchange.

Oct. 2, 2007: Nasdaq buys the Boston Stock Exchange.

May 5, 2007: Nasdaq announces it's buying OMX — which controls seven Nordic and Baltic stock exchanges — for $3.7 billion, forming Nasdaq OMX Group. The deal is finalized in February 2008.

April 4, 2007: NYSE Group Inc, merges with Euronext NV, an Amsterdam-based provider of securities brokerage services. The deal is worth approximately $10.2 billion. The new company is called NYSE Euronext.

Feb. 10, 2007: Nasdaq's bid to buy the London Stock Exchange fails after not enough shareholders accept the offer. Nasdaq had acquired a 29-per-cent stake in the LSE.

Oct. 17, 2006: The Chicago Mercantile Exchange and the Chicago Board of Trade announce plans to merge, the biggest deal to date in a global consolidation of financial exchanges. The Chicago Mercantile Exchange paid $11.9 billion US for its smaller cross-town rival, giving the new company — the CME Group — a valuation of more than $22 billion US.

July, 2006: Australian Stock Exchange Ltd. acquires SFE Corp. Ltd., a Sydney-based commodities future exchange, in a deal worth $1.59 billion US.

2001: The Toronto Stock Exchange acquires the Canadian Venture Exchange, which was created two years earlier when the Vancouver and Alberta stock exchanges merged. The new company was named the TSX Venture Exchange.

How dirty money gets clean

By Jonathan Hembrey, CBC
The ways to launder money are varied and complex and usually employ a series of transactions involving multiple organizations and countries, experts say. Money laundering is the process by which a person or organization converts cash and assets gained through illicit activity into a form that can be used legitimately and openly without drawing the attention of the authorities. The name refers to the attempt to "clean" what would otherwise be considered "dirty" money.

The broad aims of laundering systems are threefold:

To convert proceeds of crime to a less suspicious form.

To conceal the illegal ownership or origin of the criminal earnings.

To create a legitimate explanation for the source of assets.

Money laundering is an essential element of organized crime, said Margaret Beare, professor at Osgoode Hall Law School and co-author of Money Laundering in Canada. "It's important because criminals want to be able to use their money and in some cases to use it visibly," she said.
The money can be used in any number of ways: from buying houses to the purchase of more basic consumer or luxury goods. The degree of success depends on how difficult it is to for authorities to establish a connection between the seemingly legal assets and the crime from which they were derived.

The RCMP say it is difficult to determine the exact size and scope of money laundering in Canada but that it is a multi-billion-dollar industry.
Drug money accounts for bulk of laundering

Drug trafficking is the source of the vast majority of money laundering, according to a 2004 report prepared by York University's Nathanson Centre for the Study of Organized Crime and Corruption in Toronto. The report looked at 149 RCMP cases involving money laundering. It found that 72 per cent of the cases involved narcotics offences. The next largest source of money was custom and excise offences, including the smuggling and distribution of contraband cigarettes and liquor. Those accounted for 15 per cent of the RCMP cases.

There are several industries or sectors of the economy that are vulnerable to money laundering, and many of these involve cash transactions, said Rudy Duschek, senior consultant with Chris Mathers Inc., a Toronto-based firm that consults companies on how to detect and avoid fraud and money laundering.

Detecting 'dirty' money

The Proceeds of Crime (Money Laundering) Act was passed in 2000, making it mandatory for a large number of companies, including deposit institutions like banks, casinos and brokerage houses to report all suspicious transactions.The legislation established the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as the government agency tasked with facilitating the detection, prevention and deterrence of money laundering. All cash transactions, electronic transfers or casino disbursements of $10,000 or more need to be reported to FINTRAC, which has a mandate to disclose any relevant information to police.

These include deposit institutions such as banks and credit unions, currency exchanges, securities firms, real estate brokerages and insurance companies.The actual process involves three steps. The first is called placement, in which the "dirty" money is deposited into a legitimate financial institution. This is the most dangerous aspect of the operation as large amounts of cash attract attention. One common technique during this stage is called "smurfing," in which a number of people are paid to make smaller deposits — of less than $10,000 each — that are actually pieces of a larger whole. (Any transaction of $10,000 or more needs to be recorded and reported to the Financial Transactions and Reports Analysis Centre of Canada). The money is deposited into bank accounts set up for the purpose of laundering.

"So, they'll send in a bunch of people who will be innocuous, who otherwise would not attract attention … and they're effectively working for criminals to launder their money," Duschek said.
The next step is called layering, in which the money is involved in a series of transactions to obscure its origin and effectively put it as far away from its true source as possible. This can involve any number of wire transfers, deposits or withdrawals, exchanges into different currencies or the purchase of high-value goods such as cars, boats or jewelry.

The last step is called integration, in which money is reintroduced in a more legitimate-looking form, including investments into legal businesses. Those shell companies engage in a small amount of legitimate business but are largely used to put the illicit money into circulation under the auspices of legal transactions.

Many ways to launder a buck

The schemes are usually quite varied and complex, employing a series of transactions in multiple organizations and countries, said Duschek.“If I was going to choose one way to describe it, it would be next to impossible," he said. "You have to remember, criminals don't play by the same rules that we do, and they're always trying to stay one step ahead."

RCMP suspect that a series of unusual cash transactions at the River Rock casino in Richmond, B.C., were part of a money laundering scheme. (CBC)The emergence of precious metal dealers who operate cash-for-gold services represents a growing source of laundering opportunities, Duschek said.
"You know someone can get just walk off the street with a bundle of cash and basically buy an ingot of gold," he said. Once in this more legitimate form, it is easier to transfer wealth with less suspicion.

Casinos are also becoming popular for money laundering, in part because the large-scale exchange between cash and chips. Between May and August 2010, suspicious transactions totaling $8 million were reported to gaming officials in the Lower Mainland of B.C. The RCMP said they were likely the result of money laundering by organized crime.In one case, a customer purchased $100,000 worth of chips with $20 and $50 bills. He gambled for an hour, winning a small sum and then cashed out before leaving the premises.
The more jurisdictions, the better

There is a common misconception that a majority of money laundering is being perpetrated by a small number of large criminal operations when it is actually employed by a number of organizations of various size, Beare said."In fact, we're talking about petty criminals, middle-range criminals and yes, we're talking about some high-powered, large-scale, sophisticated laundering operations, but, you know, it's everything," she said.
There is also a "huge" international dimension to money laundering, where assets are channeled through a variety of organizations around the world, which makes it more difficult to track, said Duschek.
"Criminals aren't stupid, and they realize that the more jurisdictions they involve in their money laundering schemes, the less likely the authorities are to pursue it," he said.
However, although dirty money is often routed through so-called offshore destinations, it ends up in major financial centres and back in the hands of criminals, Beare said."It's probably just marching through to get somewhere else," she said.For Duschek, money laundering is a given for any criminal organization whose activities involve large sums of money. Criminals need to find a way to convert their ill-gotten goods into a safer, useable form."They want to use it," he said. "They just can't keep it under a bed for all of eternity," he said.

Monday, February 21, 2011

Green economies for growth, urges UN

The current "brown" economy is carbon and resource intensive and is not sustainable, the study says Investing $1.3 trillion (£800bn) each year in green sectors would deliver long-term stability in the global economy, a UN report has suggested. Spending about 2% of global GDP in 10 key areas would kick-start a "low carbon, resource efficient green economy", the authors observed.They also recommended following policies that decoupled economic growth from intensive consumption.
The findings have been published at a meeting attended by 100 ministers.

"Governments have a central role in changing laws and policies, and in investing public money in public wealth to make the transition possible," said Pavan Sukhdev, head of the UN Environment Programme's (Unep) Green Economy Initiative."Misallocation of capital is at the centre of the world's current dilemmas and there are fast actions that can be taken, starting literally today," he added."From phasing down and phasing out the $600bn global fossil fuel subsidies, to re-directing more than $20bn subsidies perversely rewarding those in unsustainable fisheries." Unep defined a "green economy" as one that resulted in "improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities".

When it came to investing 2% of GDP in greening the global economy, the authors recommended a number of investments, including:

$108bn greening agriculture, such as encouraging and supporting smallholder farms

$134bn on the building sector, including improving energy efficiency

$110bn improving fisheries, including reducing the capacity of the world's fishing fleet

$15bn on forestry, with "important knock-on benefits for combating climate change"

Almost of $110bn on both water and waste, including sanitation and recycling

The report, produced by experts from developed and developing nations, suggests that the green economy model would deliver higher annual growth rates within 5-10 years than a business-as-usual scenario.
In order to unlock the level of investment required, it added that it was necessary to reform existing national and international policies.

"The green economy - as documented and illustrated in the report - offers a focused and pragmatic assessment of how countries, communities and corporations have begun to make a transition towards a more sustainable pattern of consumption and production," said Unep executive director Achim Steiner.
"With 2.5bn people living on less than $2-a-day and with more than two billion people being added to the global population by 2050, it is clear that we must continue to develop and grow our economies.
"But this development cannot come at the expense of the very life support systems on land, in the oceans or in the atmosphere that sustain our economies, and thus, the lives of each and everyone of us."

The findings are being published at the 26th session of Unep's Governing Council/Global Ministerial Environmental Forum, which is being held in Nairobi, Kenya, until 24 February.

Sunday, February 20, 2011

The US Supreme Court's recent decisions in favour of Corporations

The Supreme Court has delivered a rash of sweeping victories to the corporate class, including these four top hits:

1. Lilly Ledbetter, 2007. For decades, Goodyear Tire & Rubber Co. had quietly been stiffing this longtime, loyal employee on her paycheck. A manager in the tire giant's Alabama plant, Ledbetter was unaware that she was being paid substantially less than her male counterparts -- a clear violation of federal anti-discrimination laws. Only learning of this maltreatment late in her career, Ledbetter sued Goodyear for the back pay she was owed. The corporation fought her all the way to the Supreme Court.

No go, ruled Roberts, Alito, Kennedy, Scalia, and Thomas. Under the statute, they sniffed, employees must file any bias suit within 180 days after the discrim-ination begins, and Ledbetter's suit had come 21 years after Goodyear started cheating her, so... tough luck, lady.

Forget heartless, this ruling was mindless. And needlessly picayune. Obviously, your honors, Ms. Ledbetter could not have filed within 180 days, since she didn't know she was being shorted! The honest way to interpret the statute would be that the 180-day limit begins after she became aware of the violation. But the Roberts Five were not looking for rationality, much less justice -- they were on a deliberate mission to rewrite and restrict the pay discrimination law for the benefit of corporate discriminators.

This decision sparked genuine public outrage, making it a flashpoint issue in the 2008 presidential race. Upon taking office in January 2009, Obama and the Democratic Congress pushed the Lilly Ledbetter Fair Pay Act into law, shoving the justices' corporate bias right back in their faces.

2. Making up law to help polluters, 2008. The catastrophic environmental and economic disaster caused in Alaska by the Exxon Valdez supertanker in 1989 resulted in a jury award of $5 billion to the local people who were harmed. The oil behemoth's battalion of lawyers, however, stalled pay- ment for years with various legal maneuvers, before getting a federal court of appeals to cut the sum in half. Still, despite the corporation's egregious malfeasance, Exxon pushed for an even sweeter deal, finally steering the case to the safe harbor of the Roberts Court. In 2008, nearly 20 years after the disaster, another five-man majority led by Roberts slashed the damage award to $500 million, a mere tenth of the original jury assessment -- and less than two days worth of Exxon profits.

Actually, four of the justices tried to eliminate the award altogether, arguing that a corporation should not be responsible for the reckless acts of its own managers! They fell only one vote short of imposing this creative rewrite of corporate law on us. Nonetheless, the Roberts Court satisfied its impulse to legislate from the bench by dictating a new, corporate-pleasing formula for determining punitive damages under maritime law -- a formula not found in the statute and not intended by Congress -- thus making up a law to benefit polluters.

3. Binding the EPA, 2009. The fearless five took up their legislative pens once again in two cases involving the Clean Water Act. Under this law, electric power companies must use "the best technology available" to keep from harming fish and other aquatic life when they draw from the public waterways to cool their generators.In an environmental lawsuit involving Entergy Corporation, a giant electric utility based in New Orleans, Louisiana, the RAKST quintet came out of right field to rule that the EPA should consider the cost to the power companies when evaluating "the best" environmental technologies. This generous gift to utilities was not included in the law by the legislative branch, so the five judicial branch activists thought- fully added it themselves.

Later that same year, they also diluted the Clean Water law by siding with a mining corporation named Couer Alaska. This outfit wanted to dump a waste product called "tailings" directly into lakes. The five (plus Justice Stephen Breyer this time) cheerfully decided that this pollution is okay, as long as the polluter holds an Army Corps of Engineers permit. Never mind that such dumping is expressly banned by EPA rules, the Supremes were on a roll.

4. The grandest giveaway of all, 2010. In January of last year, these five potentates of plutocracy issued a ruling that has caused a massively destructive tectonic shift in America's political process, thrusting mountains of corporate money high above the people's democratic power. The Lowdown has covered the impact and import of the now infamous Citizens United decree by the Court (see Lowdown issues September 2009 and March 2010). But it's important to add here that the Court's edict, which magically turned inanimate corporations into "persons" (with constitutionally protected electioneering 'rights' that make them politically superior to actual persons), is not only an absurd and intolerable overreach in logic, but also in process.

"Judicial activism" is way too tame a phrase for what Roberts & Company did here. This was a coup -- a plotted overthrow of the orderly judicial process in order to enthrone corporate political interests over all others.

In June 2009, the Court quietly reached into its caseload and plucked out an obscure case brought by Citizens United, a corporate-funded political front that was challenging a mundane point in federal election law. After hearing oral arguments in this ordinary case, the Roberts majority did something extraordinary: the justices arbitrarily altered the case that had been brought to them, completely rewriting Citizens United's complaint.

Instead of addressing the group's minor question, the Court issued an order for the parties to address whether unlimited and unreported sums of corporate money should be allowed in all US elections. In other words, these scoundrels in robes created their own case proposing a sweeping change in America's democratic system.

They then rushed to judgment, giving the lawyers involved only a single month to prepare arguments on this entirely new, momentous question. They also hurried the case to the front of the line, scheduling oral arguments on it in September, before the Court would normally be in session. January 2010, only seven months after they'd sprung their Citizens United surprise, the five issued their constitutional rewrite. It imposes their will (i.e., egos and personal ideological bias) over: (1) the clear intention of our Constitution's framers to keep corporations out of politics; (2) a century of settled congressional law banning corporate funds in elections; (3) the laws of 22 states that prohibit corporate spending in their elections; (4) many decades of the Court's own precedents affirming the wisdom of outlawing corporate electioneering cash; and (5) the overwhelming belief of the American people, that only humans, not corporations, should be election participants.

So, exercising exquisite judicial imperiousness, five judges decided that they're wiser than all of the above, unilaterally pulling off a sneak attack that, in the words of People For The American Way, amounts to the "constitutionalization of corporate political power."

Star Trek's translator- nearly ready

Company profile: Google On "Star Trek," even the aliens with blue skin and antennas sprouting from their foreheads spoke with Capt. Kirk in perfect English, thanks to the universal translator, long a staple of science fiction.

After more than two decades of research and investment by corporations, universities and the government, machine-based speech recognition and language translation, while still in its infancy, has made significant headway. For the first time, the technology has reached the point where it is good enough for real-world commercial products.Ortsbo offers a more basic form of machine translation, based on text, that is attracting millions of users in its first few months of operation. The new service, a unit of Toronto-based Intertainment Media, offers real-time text translation in more than 50 languages for Instant Message networks including Facebook, Yahoo Messenger, MSN and Tencent QQ, the most popular IM network in China.

Then there is Google. Leveraging its vast computing power, the Mountain View Internet giant recently rolled out updates to its Google Translate apps for the iPhone and Android smartphones that offer limited speech translation between languages. While it's not quite Star Trek's universal translator, an experimental feature of the Android app even translates real-time spoken conversation between English and Spanish.
"If you had told me five years ago that we would get to where we've gotten," said Franz Och, who leads
Google's machine translation group, "I wouldn't have believed it."

Google, which also offers a software extension to its Chrome browser that translates documents, has a powerful business incentive for translation. Only a small share of Internet content is in some of the world's most commonly spoken languages, like Arabic or Hindi. If Google can give speakers of those languages access to the large volume of online content written in English, for example, it can gain a huge audience, and the revenue that comes with it.

Google's cloud network of distributed servers, which may be the world's largest computer network, can host millions of simultaneous translations. Ortsbo, which seven months after its launch already has a traffic volume it didn't expect until 2013, is racing to build a global cloud computing network to handle the flood of chatter from China, Taiwan, South Korea and Brazil, as well as from the U.S.

"You're seeing the real emerging markets come to life, and the networks that go with them," said David Lucatch, president of Toronto-based Ortsbo, which has more than 5.1 million users, a 27 percent jump since January. Lucatch says Ortsbo's online traffic is growing faster than Facebook in its first year because he's making social networks bigger, by allowing members who lacked a common language to chat.

Ortsbo -- -- runs on 12 instant message networks, including Facebook Chat, Twitter, AIM, MSN, Google Talk, Yahoo Messenger and large Chinese networks like Tencent's QQ. The service is far from perfect: It can take the app more than 10 minutes to load onto your PC or Mac, and the machine-powered text translations regularly make the literal translation errors to which computers are prone, struggling with such colloquial expressions as "the best of two worlds."

Lucatch says that the startup is working to address those engineering problems, but that the traffic shows the powerful demand to bridge the language barrier, even if it isn't perfect yet. Ortsbo allows instant message conversations in 53 languages and 2,756 language pairings, meaning you can type in English and have your Facebook friend in Hong Kong see your IM in Chinese characters. Or, Google Talk users in Copenhagen and Katmandu could chat between Danish and Nepali, while Twitter followers in Reykjavik and Jakarta could send direct messages back and forth in Icelandic and Indonesian.

"We saw the opportunity to connect people in a new way without asking them to give up the things they like and already value, like Facebook and Google and Yahoo," Lucatch said.
The Google Translate app, meanwhile, allows users to speak or type a phrase into their phone and have it be translated into any one of more than 50 languages, some audible and some in text only. The iPhone app can "speak" translations in a synthesized voice in 23 different languages. The Android version has an experimental "conversation mode" for English and Spanish, a feature that combines speech recognition and language translation. Two people who spoke just Spanish or English could hold a phone between them, allow it to record a phrase in one language, send it to Google's cloud network for translation, and "speak" it back in the other language -- all in a few seconds. Microsoft also has a translation app that runs on its Windows Phone 7 platform.

Efforts at computer translation reached a turning point in the 1990s as scientists gradually abandoned trying to program computers with the rules of grammar and diction in favor of a statistical approach. Computer scientists like David Chiang of the Information Sciences Institute at USC say they have made great progress in having computers look at millions of sentences and their translations, using powerful statistical models to allow computers to infer the rules of grammar -- an application of artificial intelligence that mimics the human mind.

Still, computer scientists note that informal speech and text -- laden with jargon, localized expressions, inconsistent grammar, and the "ums" and "aahs" that pepper everyday conversation -- is among the most difficult problems in machine translation and speech recognition. Indeed, when Twitter announced a "Twitter Translation Center" on Monday, it said it would rely on humans to translate the site into less commonly spoken local languages.

"We've found that the quality is higher when humans translate," said Carolyn Penner, a Twitter spokeswoman. Even Ortsbo plans to use humans to translate common expressions like "your neck of the woods," that can be nonsensical if a machine translates them literally.

Chiang called the Google app "impressive," but said it also shows the limitations of machine translation.
"If I'm traveling to a foreign country, and I want to be able to ask, 'Where is the bathroom?' I'm pretty confident this app can do this," Chiang said. "But if I want to negotiate a business deal, I think we probably have some way to go."

Och joined Google in 2004 after a personal recruiting call from co-founder Larry Page, who assured the scientist that linguistic translation was central to Google's mission "to organize the world's information." But despite the advances Google and others have made in machine translation, Och believes there will be a role for human translators for the foreseeable future.

Machine translation "opens up possibilities that we've never thought of before," he said. "There will be more need for (human) translators, just because it's encouraging people to do things across the language barrier."

Contact Mike Swift at 408-271-3648. Follow him at